What brought down GM and the US auto industry was not so much superior foreign competition, but the dead weight of legacy pensions due to the legions of former union workers that GM had promised pensions to until death do them part. Unfortunately, GM's actuaries did a poor job in projecting life expectancy and thus (depending on whose figures you want to use) it costs GM $1,200 per car more than the competitors simply because they have to pay nearly 1 MILLION FORMER employees a pension, not to mention health care. This is why pensions and health care coverage were more or less cut in this most recent negotiation GM had with the United Lazy ...err... I mean Auto "Workers."

Regardless, GM exemplifies what can happen to an entity that was presumably unassailable. GM was king in the golden age of America, but since those days have come and gone, so has GM's prominence.

Another entity that is presumed to be unassailable or infallible is government. Every basic college finance class assumes there is zero risk in investing in government securities because the government is all powerful and can just tax it's way out of debt (completely ignoring the Laffer effect). But this is not true. A perfect example of a government going belly up is Argentina where it owed the western world over $130 billion and one day decided not to pay.

People, or at least the markets, do not assume such irresponsibility on the part of the US government and still assume it will always pay back its debts, but like GM, governments' solvency (state, federal and local) may be threatened by pensions.

Usually it was assumed that social security or medicare/aid would be the programs to bankrupt the US government. And for the most part, this is true. Osama Bin Laden might as well have just stayed at home because for all the hubbub and tragic loss over 9-11, he could never hope to wreak the havoc that FDR's demon child will upon the US. I mean if you think about, if you REALLY want to destroy a country, don't fly planes into a couple buildings, institute socialism. Just ask Lenin, Stalin, Mao, Jong Il, and Pol Pot.

Regardless, it is not just medicare and social security that will take its toll on the US economy in the near future. It's also the pension problem.

Public pensions, the money promised to government workers when they retire, are underfunded. meaning they don't have the money to make good on the promises they made to everybody, ie- they can't afford the pensions. This means one of two things. Either the government cuts the pension benefits to their employees (heh, good luck) or they tax the American people more (ding ding ding, correct answer).

But this creates a problem and a scenario I see to be more and more likely. Given the housing crash occurring and the increased likelihood of recession, I don't care how many times they cut the interest rate, I think this country is heading for recession (again, I hope I'm wrong). And if we go into recession, then corporate earnings will drop and so too will stock prices.

Compounding the downward pressure on stocks will be the likely election of a democrat to the White House or a capitulating moderate republican, both of which will kowtow to the pressures to raise taxes and redistribute wealth. This will put further downward pressure on stock prices.

But more pressuring than that will be the retirement of the Baby Boomers which begins more or less now. The elder echelon of the Boomers are taking early retirement as we speak and as you enter retirement you switch your holdings from equity to fixed income. This outflow of cash from the equity markets into fixed income will put downward pressure on stock prices (but also push interest rates lower). Also, to make good on their social security and medicare promises, the government will have to increase taxes.

Thus the potential scenario I see is one where housing prices continue to drop, but the stock market continues to drop as well, and the ensuing decrease in consumer spending and confidence, compounded by likely tax increases in the future will throw and keep the economy in recession for a while.

And, in a viscous downward spiral sense, since pensions are primarily funded by investments in the stock market or securitized assets therein, this chart is bound to go down further as stock prices plummet.

Saturday, September 29, 2007

I've always likened taxes to the level of abuse a husband may dish out to his wife. For if you want your wife to stick with you, you would shower her with gifts, adoration, praise and take her out for nights on the town of dancing, dining, flowers and muchas schmoochas. If you want her to leave, ignore her, treat her poorly and cheat on her.

With business, capital, investment and labor it is the same way.

If you want to attract these things to your country and keep them, then you should treat them nice. Treating them nice meaning you keep taxes low, you make regulation non-existent or unburdensome and have a good and fair legal system. And while I primarily focused on taxes, there are other things you have to focus on just as you would your wife.

The Eurasia Group has this "Honey Do" list that companies must follow if they wish to emulate the likes of Ireland, Bermuda, Jersey Island and the whole host of other countries that beat out the economic growth rates of the US. The higher the score, the more points you score with business and capital markets, and thus the happier economic marital bliss you have;

Thursday, September 27, 2007

I compiled this chart about 2-3 years ago and thought it worth of an update. Household debt includes not just credit cards, but mortgages as well.

Of the many things that will bring down this country, Americans' desire to spend more than they make will be one of the key ones. Household debt is now at 97% GDP. We could all work one year and (assuming the government doesn't tax us, nor that we'd eat or spend any of our money on anything) then we could pay back our debts.

What's sad however is that this is even worse THAN THE GOVERNMENT! Federal debt as a percent of GDP last I checked was at about 48%. The government is a less voracious spender of money than the American public! American consumers and households are on par with the Italian government and it's knack for deficit spending and racking up debts.

Not to mention, as I've mentioned before, with all the Baby Boomers retiring shouldn't this figure be declining? You know, that as you approach retirement you'd pay off all your debts so you don't saddle future generations with yours? Though I don't doubt for a second it is my generation that is the primary culprit in skyrocketing this figure up since 2001.

Bush is usually blamed for cronyism, allowing the rich to get richer and the poor to get poorer and most leftists, deep down inside hate Bush and love, albeit reluctantly maybe, Hugo Chavez.

But Hugo acts as an x-ray machine, showing us just what hypocrites these Hugo supporters are.

At the center of the argument is that Hugo is good and holy, helping the unfortunates, while Bush is evil and conspires with his cronies to make money and trip old people and murder poor people.

The reality could not be any different.

Not that I believe Gini coefficients matter, but an article in The Economist shows that under Hugo Chavez the Gini coefficient has increased, increasing the disparity between rich and poor.Additionally if you read the whole article (or just the next paragraph) you'll see Hugo is infinitely more corrupt and cronyistic than Bush ever was, dealing out contracts and deals to his buddies and those loyal to him on levels that make Bush seem like a Swede when it comes to corruption.

But the hard core leftists won't believe it, simply because they don't want to. They have a rationale to hate Bush and love Hugo, to fight capitalism and advance socialism, even if it doesn't carry out their self-proclaimed aims of helping out the poor and fighting off corruption. But that's the rub of it all. It isn't about the poor, the poor are just pawns in this game. It is again, as it always has been, about making the left feel good about themselves. Reality be damned, freedom be damned, economic growth and prosperity and the abolition of poverty be damned, I want to think of myself as a good person.

Though deep down inside, you wonder if they really believe it themselves.

Tuesday, September 25, 2007

My buddy Chico is a mortgage broker. His background is both musician and computer genius, so when we debate politics or economics it's basically like talking to a middle schooler. So we had a bet. I bet him that housing prices would be lower in May of 2008 than they are today.

To which he responded "well how are we going to measure that?"

I suggested, "the Case Shiller index."

"Well I never heard of that, sounds kind of bogus. We're not using that."

"OK, what about the OFHEO House Price Index?"

"You know, I never heard of that either and besides which the government isn't taking into consideration what they're appraised at, only what they sell for."

Which is CLASSICALLY leftist. If the source, no matter how authoritative or unbiaseddoesn't produce the results you want, then it's biased and unreliable and under the control of George Bush.

So here is a simple lesson in economics folks, especially for all you schmucks in the housing industry that insist there is no housing bubble;

1. CASE SHILLER IS THE AUTHORITATIVE SOURCE FOR HOUSING PRICES, END OF STORY!

2. HOUSING PRICES HAVE GONE DOWN AND WILL CONTINUE TO GO DOWN, END OF STORY!

Here's a spiffy little chart that shows you national and Minneapolis area prices.

Monday, September 24, 2007

I really don't have patience for ignorance or idiocy. I really don't. Thus I lament the loss of my youth when in college I would try to argue with brainwashed skulls full of mush about the merits of capitalism, Libertarianism, the evils of socialism and what have you. Because what is the point? Kids at that age, who are now (perish the thought) adults are so intellectually dishonest that they are going to believe in what they want, regardless of the truth, regardless of empirical evidence, regardless of facts. And I'm not talking religious right facts like "it says so in the bible." I mean like, "the Federal Reserve's 8th district came out with a report" type facts.

But the biggest waste, the most futile mission you could possibly go on is trying to convince a brainwashed dolt that subscribes to the farce that BIG OIL is somehow controlling prices.

A complete waste of breath.

None the less, that doesn't mean you're not going to run into them. And when you do, it is insanely hard to fight the urge to use your superior knowledge to backhand them into reality.

So here is the least painful way you can do it;

Big Wheat.

Yes, Big Wheat.

While the world's leftists are worried about Big Oil, little do they know the true threat comes from Big Wheat. For while Oil has increased 100% or so, it has been nothing more than a diversionary tactic to distract the innocents of the world from the real threat;

Big Wheat.

For wheat has nearly trebled in price!Wheat producers who are in cahoots with the Bush Administration have been conspiring against the American public to fleece us of our hard earned money to line the pockets of the special interest groups of Big Wheat.

We should pick a day that NOBODY BUYS BREAD! That'll stick it to them! Yes, the Wheat Boycott Day! You see, if we all stop buying bread on one day, then according to some inane, college sophomore, American Idol level of incredibly flawed logic, we'll somehow be able to stick it to those fat greedy corporate Big Wheat bastards! We'll show those corrupt Big Wheaters that we don't answer to Big Wheat!

However, on a serious level, the point you can make (though I doubt it will stick) is that as the global economy has grown, demand for all sorts of foods and commodities has skyrocketed. Not to mention the push for ethanol has allocated more land to corn and less to other grains. These factors have driven up the prices of these commodities at a rate faster than oil.

Of course, such a logical and commonsensical explanation won't hold against the literally delusional, ulterior-motivated leftist thinking. You could show them all the charts and data in the world showing them it's a booming global economy that is driving up commodity prices and they still won't believe.

Big Copper.

Big Aluminum.

Big Tungsten.

All of their prices have increased as fast if not more so than oil.

The truth is they WANT to believe its Big Oil.

And in WANTING to believe, it means they don't really BELIEVE its Big Oil at all

Which means they're intellectually dishonest.

Which means they must have an ulterior motive.

Which, frankly, and simply is that they hate capitalism, want your money and need a villain to rationalize the transfer of wealth.

So after Amedijonmustard makes an ass of himself and gets a little taste of the weakest elements of New York City, the Iranian State media spins it worse than the Democrats ever could and make it sound like we were giving him standing ovations.

You just know that these schmucks (note the Hebrew jargon to provide particular insult to this nazi) know they're lying through their ass, but I think they really think they're fooling their people and us.

They always "say" that it takes years for various people convicted of horrible crimes to inevitably get executed. Years after years of appeal racking costs to the tax payer to keep them alive and then post pone their death.

Sunday, September 23, 2007

They come from Time magazine, which I know, I know, is nothing approaching The Economist, but I have to give credit where credit is due.

The first one I particularly like because it is (thus far) the only chart/graph/data that shows just how much housing prices in various cities have dropped in real terms. Of course when you compare the gains housing has had in the past 5 years versus what it's lost in the past year, the housing problems seem over-exaggerated.

However, since everybody in the US spends more than they make and rely on increasing asset prices to afford their unsustainable lifestyle, even a slight decline in their asset values can bring about a halt to their spending as well as bankruptcy.

The other question is that's fine prices have dropped by 5% or so, but how much more does it have to go. I'll still sticking by my 20-30% range.

This chart shows you the standard Case Shiller chart that is finally getting some play, but I like the embedded chart showing job growth.

In both instances I would love to revisit these charts a year from now to see just how far housing prices will drop and just what happens to job growth.

But remember, no matter what these charts say, we're not in a housing crash according to most banks.

Thursday, September 20, 2007

I don't like children, but when I saw a bunch of these at the atrium to the apartment building I grabbed a copy out of sheer boredom.

But then my cunning, economic spidey senses eye caught something.I have deleted the woman's face simply because she could be a model for all I know and she is not the point. But TRIPLE ECONOMIC BONUS POINTS to the astute junior, deputy or otherwise economist that points out what's wrong with this picture (aside from the obvious that so much attention should not be paid to children)

Tuesday, September 18, 2007

I found this chart very interesting as it shows you just how much people trust different groups of people. Most shocking is that people trust their doctors more than they do their spouses, but given how divorce has become an Olympic event since the 1960's, I guess I should not be surprised.

Naturally, and deservedly so, employers are ranked at the bottom along with health insurance companies. Though I thought the Po-Po would have faired much worse. Than again, maybe it's just Minneapolis where the cops are completely inept morons and elsewhere the boys in blue have some measure of intelligence (people think I have a grudge against the MPD when in reality, no, seriously folks, don't move here, they really are that incompetent).

Monday, September 17, 2007

Hey All Aspiring, Junior, Deputy and otherwise Official Economists, the Captain will be in Las Vegas this week! Don't know if any of you are out there, but I'm taking a quick break before busy season starts and if any Cappy Cap readers are out there and up for a cocktail shoot me an e-mail!

Seriously, this is why I love The Economist. In one article the author nails three things I've been saying ever since this blog was formed and are very pertinent to today with all the celebrityship and flak Alan Greenspan's been getting;

1. THERE WAS NO RECESSION IN 2000-20012. IT'S NOT THE FEDERAL RESERVE'S JOB TO MAKE YOUR STOCKS AND HOUSE PRICE CONSTANTLY GO UP, IT'S JOB IS TO KEEP INFLATION LOW3. A RECESSION MAY NOT BE THE WORST THING FOR THE AMERICAN ECONOMY

The idea of globalization is that capital can flow freely and various entities can invest in various ventures in various countries resulting in the most efficient allocation of capital around the world, resulting in amazing increases in productivity and efficiency, resulting in dramatic increases in standards of living for everybody. That's about it in a nutshell.

But some countries put up barriers because they're afraid "foreign interests" will buy out their country. The US is just as guilty of this with our denying China from buying Unocal or our fear in the 80's that Japan was going to buy us out. But some countries feel their sovereignty is particularly threated when foreigners buy their land and therefore put very high taxes in place to prevent that from happening.

Something to think about the next time you want to buy some South Korean property.

Saturday, September 15, 2007

The trick to getting elected is to tell people what they want to hear and then deliver them the goods.

Doesn't matter if it undermines the future of your country because fortunately (for you) you'll be long dead before that materializes. So you can borrow against the future to promise people today what they want without having to increase taxes, ensuring you have a good, healthy and profitable political career.

And while you may think things are bad here in the US, just be happy we're not Greece;

Hedge funds, private equity firms, bulge bracket, these are largely the domains of the well connected, nepotists and cronies. If you weren't born into it, doesn't matter how good you are, they ain't letting you in.

Thus, it feels good when these presumed "champions" suck tail pipe and show that their position is due more to factors outside their control than their actual skill or talent and ability to produce wealth;Remember, in the long run, old money inevitably gives way to new money because they have no game.

Monday, September 10, 2007

I was actually thinking that the Republicans would take back congress in 2008. Call me crazy, but I thought the defeatist mentality would wear thin on the American public, but I underestimated their hatred for Bush and their hatred for the war in Iraq. And I underestimated it by a lot. Apparently the Democrats will trounce the Republicans in 2008, congressional elections and presidential elections as well.

Which means it's a perfect time to vote Libertarian, because seriously, the Republicans are just a lame, if not, quadrapalegic horse to bet on (though Fred Thompson will probably get my presidential vote).

Sunday, September 09, 2007

I was driving around to some place or another and happened to be listening to NPR. And I do like NPR, they do put on some decent pieces and cover topics that I find interesting and are of importance to the international community, and I take it with a grain of salt because I know they're biased. But what I will not tolerate is when the government media outright LIES and then tries to push itself on the public as some kind of independent or objective media source. And I find it my obligation to point this out and make a record of it.

The story they were covering was how Chile may be the prime example of economic success (are you ready for the "but"?)

BUUUUUUUT

income distribution was uneven (oh the horrors).

Chile, in part due to free market reforms under Pinochet, and now today because of high commodity prices (copper) was experiencing an economic boom, but this boom was only being enjoyed by the easily-accusable villain, "the rich."

And what they do, always, ALWAYS without fail, is grab the one or two poor schumcks out of the tens of millions of people who had a run of bad luck to tow the line, "I haven't benefiting from the economic expansion."

It's probably the most overused play in NPR's play book.

If the statistics and figures don't show the story you want to tell, find the one or two people that have anecdote that does and then present that as the truth and reality of the situation.

And so, once again, it seems it's the people's responsibility to keep the government media in line and point them out to be the liars they are;

First off is the Gini Coefficient that measures income distribution.

Longitudinal data is hard to come by, but I found a report from the World Bank that cites the Gini coefficient has "worsened" in the past ten years in Chile (interesting how they somehow assume income distribution can be "better" or "worse," thereby implying improvement would be a more equal distribution, and following the logic a 100% equal distribution of wealth,ie-communism, must be ideal then). Regardless, this worsening of the gini coefficient had gone from 56.4 in 1995 to 57.1 in 2005.

To provide you with a visual aid I have charted this;

To quote Rush Limbaugh, "well yip yip yip yahoo!"

You've got to be kidding me? Yes, I guess if you want to claim that income distribution has "deteriorated" in the past ten years, you can say that mathematically, but a change from 56.4 to 57.1 is nothing, and probably not even statistically significant. Yet, we're supposed to believe that income distribution is horribly worsening in Chile, to the point that revolution is pending.

Another Jim Dandy chart is to show Chile in relation to the rest of its South American peers;

Oh the horror! It's really no worse or better than most of their peers. Matter of fact, they have more even distribution than South America's two socialist darlings; Bolivia and Venezuela (though in the pursuit of intellectual honesty, these figures do come before President Morales took over Bolivia, so it remains to be seen what income distribution would look like today)

Regardless, we can talk about "income distribution" all day, but in the end, it really doesn't matter. Because what really matters is whether real incomes are going up and that poverty is going down. And in Chile, this has been the case.

If the poor were receiving NONE of the benefits of this economic boom then poverty rates would not be dropping precipitously as they have been. Again, this shows you that if you really want to eliminate poverty, if you REALLY DO CARE ABOUT YOUR FELLOW MAN AND THE POOR then (and I'll say it again, because it doesn't seem like anybody on the left is listening) YOU WILL BECOME THE MOST ARDENT SUPPORTER OF CAPITALISM IN THE WORLD.

I don't know how much easier it can be, but how you can look at the economic history of the world and NOT conclude that the best thing for eradicating poverty is through free markets, then you are ignorant or have a vested interest in socialism. If you look at this and still advocate a Chavezian type of socialism or any type of socialism, then you don't care about the poor as much as you care about advancing your own little political ideology. It is one of the reasons why I have so little respect for leftists because on one hand they claim to be the most devout supporters of the poor, but on the other hand they are too intellectually lazy to actually go and study what brings about the elimination of poverty, let alone advocate it, let alone they actually FIGHT IT.

Sadly, the older I get it seems advocating leftist political ideologies is more of a make-myself-feel-good hobby than their practical, intellectually honest, and genuinely caring capitalist counterparts. Worse still I think about how many people are kept under poverty for a hobby.

Here you have a country with (if I'm not mistaken) the world's 4th largest proven reserves of oil. But, besides being a dictatorship, it is also a socialist nation with heavy state intervention in the country. Only a socialist economic system could make it so that the world's fourth largest holder of oil has to import gasoline.

But what is even more pathetic, is that over 1/3rd of Iran's government budget is spend on FUEL SUBSIDIES!

How much of a political issue is the price of gas in Iran?????? It would be like the US spending all of the social security budget AND MORE on subsidizing people's gas. Almost double what we spend on the military. And Venezuela is not far behind.

Just consider these facts before you go accusing out government of being in cahoots with "Big Oil."

You all probably know Ro! from his occasional publishings, but you might want to visit his site. He has some pictures from Iraq that you're just not going to see in the MSM. And it's nice to see, for a change, pictures showing that there might be some good going on over there and that our soldiers are indeed not a bunch of raping, torturing heathens.

Normally, normally the US economy summarily trounces the European economy when it comes to economic growth. In the past I've compared economic growth rates of the two regions to one another and usually the US doubles the rate of economic in Europe. I then point at Europe and guffaw making some comment about soccer or British cooking or something.

However, times are achangin'. With the housing slump now about to enter its first full year, it has taken the shine off of US economic growth, making us, well, more European. Matter of fact, Europe (bar this latest quarter) consistently and by wide margins exceeded US economic growth in the past year.

And as far as I can tell this will continue as long as that housing market continues to loom over the US economy. I better trade my blue jeans in for some crumpets.

Tuesday, September 04, 2007

There are two ways to go about cutting back on your gasoline consumption.

The cool way and the nerdy way.

The cool way is to get yourself a motorcycle. Gets great gas mileage (mine gets between 45-52 MPG last I measured), chicks dig it, and you cannot help but look cool on it.

The nerdy way is to get a hybrid. That just screams "pansy." And your mileage isn't even that much better. Reports show a little bit more around the mid 30's in MPG. And no chicks, except them kind of gray haired, aging hippie chicks with no make up who aren't interested in you as much as they are the environment.

Regardless, the drawback to the motorcycle (aside from if you wipe out your either dead or paralyzed) is that you can't listen to talk radio. Oh, I know, I'm sure there's a way, but on my motorcycle I can't, no radio. So it leaves me with a lot of thinking time on the highway as I do more than most environmentalists to cut back on my gas consumption.

The cool thing about this is that when you are working, you are not usually thinking. You are carrying out tasks. Not pondering or scheming a way to come up with a better mouse trap. Thus, this is why the majority of great ideas happen while driving on the interstate, sitting on the toilet, or laying about doing nothing in particular, which is what happened to me yesterday.

I finally figured out why the economy may be growing so great, while the housing market plummets. I was of the opinion that a recession MUST occur at some point in time or another, but now I'm not so sure. The reason why is that while the housing bubble and subsequent crash may even rival that of Dotcom Mania, it really may not have that much of an effect on the larger economy since housing for most people is an expense.

Most of us look at dropping housing prices as a bad thing as the value of our largest asset, our house drops. However, unless you're planning on selling it, its value is largely irrelevant since it is the cash flows associated with the mortgage that you have to pay that matter.

Even if you don't own housing, but rent, the same thing applies. Such a glut in the market in both single family and multi-family means there's a glut of housing no matter if your own or rent. If you own or are looking to own, your options for housing and its affordability have never been better. If you rent, you're able to negotiate landlords down and get discounts lowering your rent expense.

The ultimate end result is that people's largest single expenditure, housing, has decreased, leaving more disposable income in their pocketbooks. This in part may explain why the economy grew at 4%, consumer spending remains healthy and why consumer confidence remains high as well.

Alas, it may just be the banks, mortgage companies and real estate developers that pay in the end...exactly those who deserve to pay.

Saturday, September 01, 2007

They dedicate their lives to the destruction of the West. They foam at the mouth when they see our power. They hate us because of simple envy and greed and therefore spend every waking hour of their finite lives wasting it by scheming a way to bring about our end. And in their greatest hour they manage to really do...nothing.

I noticed on the GDP per capita chart I posted last week that if you look at it, you see in the grand scheme of things, the terrorists have utterly failed. If their goal was to some how "destroy" the US or "hurt" us, all they managed to do was make us hiccup. For the last "recession" we had was the weakest in recorded history (and by definition couldn't even be considered a recession because of its weakness). And as the 9-11 attack came and went, the US continued on a stratospheric climb in increased prosperity and standards of living furthering the gap between what Western civilization can achieve and what radical Islam offers. In other words the terrorists did absolutely nothing to us, though I say this not to trivialize the loss of 3,000 people on September 11th, but to trivialize what the terrorists did, for they utterly failed.

And sadly, for the terrorists they can't even claim to have even caused that economic hiccup. Chances are that "recession" was due more to the collapse of the Dotcom Bubble than it was the terrorist attack, making the attack more like a mosquito bite than a wasp sting.

Regardless, I just wanted to point this out to all of you aspiring, junior, deputy or otherwise terrorists out there. You have a choice, you really do. You can go ahead and subscribe to this "hero" syndrome and go on some epic crusade to "kill the infidels" which basically means you're going to throw your life away for no purpose aside to give the West a hiccup, or you can go and live your own life and do what you want.

I figured with all their extra labor, newly elected reform minded leadership in Brazil and Mexico and increasing market prices for commodities (read Chile and copper), Latin America was overdue for a little economic come back.

To success.

Though I don't think Venezuela and Bolivia will be getting in on the action.